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De-jargoned: Property collaboration
written by Ashwini Kumar Sharma, published in Mint.December 12, 2014

The Union urban development
minister had recently approved the increase in floor area ratio (FAR) in Delhi
for plots above a certain size. The increase—from 150% to 200%—is for
residential plots that are 750 sq. mt or more in size. For plots bigger than
1,000 sq. mt, the FAR has gone up to 200% from 120% and the ground coverage has
been increased from 40% to 50%.

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FAR shows how much (according
to the development plans and zoning laws of individual states) area you are
allowed to construct on a given plot size. Property owners who have plots
larger than 750 sq. mt stand to make windfall gains as the rule will enhance
the value of the plot. It will result in bigger homes, &nbspgive a boost to construction on vacant plots,
and reconstruction of old properties that had lesser coverage. The change is
also expected to augment collaborations between land owners and builders.

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WHAT IS PROPERTY COLLABORATION?

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It is an agreement between a
property owner and a builder. The property is typically a vacant plot or a
dilapidated building or a building that has been built with a substantially
lower FAR than what is allowed. Generally, in such an agreement, the builder
puts in the money for the new construction while the owner contributes the
land. Since the cost of land itself forms 75-90% of a property’s total cost in
metro cities, the right over the new building is also shared in more or less
the same ratio, say, 75:25 (land owner:builder). This means that if the new
building consists of four floors, the land owner keeps three floors and builder
will get one. However, this ratio may change depending on land and construction
costs. In some cases, the builder may have a larger share if the construction
cost is higher, or may have paid additional money if the margin of profit is
higher.

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Through collaboration, a
builder can save on capital expenditure since the land will be provided by the
land owner. Through such deals, the owner, too, makes a saving, as she is not
required to spend money on development. Going back to the above example, the
builder not only recovers cost but also earns a profit by selling that one
floor. The other three floors remain with the owner.

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TYPES OF AGREEMENTS

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&nbspThere are broadly two types of property
collaboration agreements. The first type is where the developer enters into an
agreement as an agent of the land owner to carry out the development. The
second is where the builder signs a deal for purchase or lease with the owner
and simultaneously commences development on the land. This is also known as agreement
of sale and development, and is the more common type.

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If you are signing an
agreement under which you will get a certain number of flats (or floors), you
will also have to sign a power of attorney (PoA) agreement in the builder’s
favour. The builder needs this to get various approvals for construction and to
sell the floor(s) or flat(s). The cost of approvals and paperwork is usually
borne by the builder.